If you sell an investment property like a rental home or other piece of commercial real estate, you will owe taxes on the gain. Between capital gains tax and depreciation recapture, a taxpayer could pay more than 1/3 of their gain in taxes.
Many investors turn to DST programs to complete a tax-deferred exchange (known as a 1031 exchange). DST programs offer several advantages over finding individual replacement properties.
Some DST programs have an additional feature known as an UPREIT option. In these, an investor may have their DST interests subsequently acquired by a REIT on a tax-deferred basis, in exchange for Operating Partnership units (OP units).
This UPREIT option can provide additional benefits, such as:
Further diversification: A DST may own a handful of properties, while a REIT may own hundreds
Increased income: OP units often have a higher yield than DST interests
No need for future exchanges: An UPREIT transaction ends the ability to complete future 1031 exchanges, but maintains the investor’s tax-deferred status indefinitely (subject to some limitations).
Ability to control the timing of taxes: Deferred tax is not due until OP units are redeemed. An investor can choose if and when to request a redemption.
Liquidity for heirs: Heirs can choose to redeem OP units at stepped up basis. DST interests do not usually provide liquidity to heirs until the properties in the DST are sold.
The 1031 exchange rules are complex. It is advisable to speak with a tax professional and a financial advisor well before an investment property is sold.
Inflation is one of the major risks to retirement. We’re all living longer, and the things we spend more of our money on in our older years (healthcare, senior housing) have the biggest price increases.
The recent inflationary environment is fresh in everyone’s mind, but even 2% inflation (the Fed’s current goal) is a risk to a retiree’s spending power over time. In a simple example, a $100,000 lifestyle when you initially retire would cost you over $148,000 in 20 years, assuming prices rose at a constant rate of 2%.
Inflation can’t be controlled, but evaluating it within your retirement plan can help identify ways to mitigate it. Here are a few ways inflation can be considered.
Investment Allocation: Investing too conservatively may mean that your investments won’t meet your spending needs long term. You want to make sure that you have enough invested for growth to keep up with inflation. This is not a static allocation. Integras Partners’ investment strategies are designed to align with anticipated inflation-adjusted spending needs over time.
Investment Selection: Investment selection within your portfolio is also a consideration. For example, there are types of investments that typically keep ahead of inflation, such as companies with a history of dividend growth and real estate.
Social Security Claiming Strategies: Delaying social security can give you higher lifetime benefits, but factors such as health and longevity must also be considered.
Strategies to Offset Healthcare Costs: Healthcare costs can be significant at older ages, and costs inflate at higher rates than other spending categories. Evaluate long-term care insurance or how to best make use of an HSA.
Withdrawal Strategies: Withdrawing too much in early retirement years, or having to sell assets to meet withdrawals during down markets are major risks to the longevity of a portfolio. Dedicate a portion of investments to near-term spending needs using relatively conservative, liquid investments. Drawing from that portion of the portfolio allows longer-term assets to remain invested for growth (to keep up with inflation), with the time needed to recover from market downturns.
Many people have unanswered questions about setting themselves up for a successful retirement. Below are the primary risks to consider and some general ideas for overcoming them. We help our clients address these risks through financial planning, which starts with identifying the amounts needed to fund goals (like retirement). This conversation is different for everyone, so we invite you to connect.
Underfunding:
Not saving enough for retirement becomes harder to correct in later years. Try to maximize saving through your employer’s retirement plan. Many Americans contribute only the amount that triggers an employer match, failing to adequately fund this primary channel for retirement savings. Since salary-deferral contributions are not taxed, the reduction to your take-home pay is less than any contribution increase.
Overspending:
Be conservative with your portfolio’s growth rate assumption, and try to set your baseline withdrawals below that rate. Overspending early in retirement can be particularly detrimental to the longevity of your portfolio. Consider a flexible withdrawal approach where you can give yourself a “raise” In years when the market performs better than you projected.
Longevity:
Life expectancies are a mid-point, not an end-point. What you don’t want to do is plan to live to age 88 and turn 87 without enough money for the next 10 years. With increasing life expectancy, retirees should plan to spend 35 years in retirement.
Investments too Conservative:
The refrain of maintaining your principal and living off interest is not a good strategy. Inflation compounds every year, so every retiree needs some growth investments to maintain their lifestyle. Growth investments do better over long periods of time and can offset the challenges of increased longevity and rising costs.
Inflation and Medical Costs:
Inflation occasionally spikes (like after COVID), but even a 4% rate doubles your expenses in 18 years. It’s estimated that 80% of your lifetime medical expenses occur in your last five years, and the medical cost inflation rate averages 8%. Be sure to factor rising healthcare and living costs into your retirement planning.
The “4% Rule” is outdated and can compromise a peaceful retirement if markets decline early in your retirement. Integras Partners created time-layered strategies to grow investments with appropriate risk throughout your retirement.
Today, U.S. stocks are relatively concentrated. An investor in the S&P 500 is putting 40% of their money in the 10 largest companies. Historically, such concentration doesn’t work out well. The S&P 500 is also expensive. Such a concentrated and expensive market requires corporate earnings to continue growing unabated (to support the prices).
There is rarely economic certainty but until new government policy and the resulting economic impacts are understood, you should expect fairly big market swings. It’s been an unusually long time without a market correction (a 10% decline). One or more market corrections this year would not be surprising, so you should be thoughtful about how your portfolio is invested.
Market corrections can come and go in short order. More protracted declines take longer to develop and recover from. It isn’t so much the loss of value that has the most impact on your portfolio, and your well-being. It is the loss of time. Value will rebuild itself. The question is, do the growth assets in your portfolio have that time?
Integras Partners’ Time Horizon Investment Process can help. You can sustain your lifestyle with the money we set aside in Income Strategies, which provides the time needed for our Growth Strategies to capture the growth rewarded by volatile markets. You’re always welcome to speak with us about how we might guide you. The greatest value we can provide clients is the ability to not worry about money, and to go live life!
Call us today to learn how we can help. 404-941-2800
You’re on your financial journey and we can help people pave their own path. This quarter’s commentary blogs start with a recap of 2024 and our views of economic conditions. Then we share some of our ideas for timely investing. You’re always welcome to speak with us about how we might guide you.
2024 was a year of Artificial Intelligence and the biggest company stocks. Despite December weakness, the S&P 500 Index (a common barometer of the U.S. stock market) gained 25% for the year. However, most of this gain was isolated in the largest and most growth-oriented stocks (most of which are heavy into AI), which investors paid more and more for. Smaller companies showed some strength but faltered as concerns about Inflation prospects and continued economic growth kept coming up. Still, small cap stocks finished the year up 11%. Our robust gains were not shared by the rest of the world. And bonds provided a mild 1.3% return.
Our economy is growing at a healthy rate with low unemployment and inflation around 3%. This supports continued corporate earnings growth and possibly the quite high stock prices we have today. The near future appears primed for further growth as many U.S. consumers are getting raises, have little debt, lots of credit available and job security, all of which encourages more spending. While this all sounds supportive of another good year for markets, you must also consider risks to this view, specifically the relatively high stock prices and how further economic growth impacts inflation and interest rates.
The more an economy grows, the more demand there is for money, which increases long-term interest rates. Also, some policy initiatives voiced by the new administration (i.e. tariffs and deportation) are likely to result in higher costs for US companies. Regulatory reform and a more relaxed tax regime should boost earnings growth. Over the last 3 months, long-term interest rates have risen at almost the fastest pace ever because of these possibilities, and they could potentially go higher. Higher interest rates put downward pressure on stock prices, especially when they are already high.
As we age, living situations and health needs will change. Parents and their children avoid planning for them, for very understandable reasons:
Parents don’t “want to be a bother”. Kids “don’t want to pry” into their parents’ lives. Money conversations can be tense. Parents don’t want to choose one child over another to take important roles in making health and financial decisions.
Our Generational ConversationsTM program helps adult children and their elder parents navigate planning for Housing, Care Management, Financial Continuity, Legal Strategies, and Security.
We want to help. As families get together over the holidays, it’s a great time to broach these subjects. Click here to download our free Themes for Family Conversations. We wish you all the joys of the holidays and everyone in your family a little extra peace.
Call us today to learn how we can help. 404-941-2800
